“Israelis and Palestinians are in the same time zone and are pretty similar culturally,” said Eyal Waldman, chief executive officer of the Israeli maker of chips for data-center adapters. He chose the Palestinian city of Ramallah after considering India and China because of lower costs and the proximity to the Mellanox headquarters in Yokneam Elit.

Israeli companies are following Intel Corp. (INTC) and Cisco Systems Inc. (CSCO), which have been outsourcing to Palestinian companies including Asal Technologies and Exalt Technologies for more than a decade. Mellanox is one of the few Israeli companies willing to go public with its Palestinian investments because others are concerned about negative reactions from the Israeli media and public, said Avi Nudelman, head of the Israeli- Palestinian Chamber of Commerce and Industry.

“Most of the contacts are private and both sides prefer to keep it that way,” Nudelman said in an e-mailed statement.

Fanzilla, a social-networking software company that develops corporate Facebook fan pages, recently hired two West Bank software developers for its team. One is already a team leader and both are developing new features.

“We definitely want to penetrate into Arab countries as well and this will help the process,” Chief Executive Officer Sagi Gordon said.

Economic Growth

About 32 percent of Palestinian technology companies are working with Israeli partners through outsourcing and sales agreements, according to a 2010 report by relief and development organization Mercy Corps.

The Palestinian technology sector has grown to 250 companies employing 5,800 people in the past five years. That helped the West Bank economy expand about 8 percent last year, from 7.2 percent in 2009, according to the International Monetary Fund.

Israeli and Palestinian executives say building up private industry is critical for further economic growth and peace in the region.

“Some people think I’m crazy,” said Waldman, 50, who three decades ago patrolled the West Bank as an Israeli soldier. “But it is important for the two countries, the two peoples to start working together to build a future.”

The Palestinian Authority is trying to make the technology sector “one of the pillars of the economy because it is knowledge-based and we don’t have natural resources,” Murad Tahboub, Asal Technologies’ managing director, said in a joint interview with Waldman in his glass-and-metal building in Ramallah’s new financial center.

Matching Partners

Asal has been helping Mellanox develop chip software for eight months. Mellanox, which plans to open a center in Ramallah, currently employs five people there.

Some programs such as those sponsored by Mercy Corps and the Peres Center for Peace try to match Israeli companies with Palestinian software engineers to exploit the momentum.

Assaf Kindler, project manager at the Peres Center, said he gets daily calls from at least one CEO and an Israeli start-up company exploring the possibility of hiring or outsourcing to Palestinians.

In December, U.S. Secretary of State Hillary Clinton unveiled a program to help promote the sector that included a $5 million investment by Cisco, a $2 million commitment from Google Inc. (GOOG) and pledges from Intel, Hewlett Packard Co. and Salesforce.com for outsourcing projects in the West Bank.

Start-Up Nation

The Palestinian Authority has no access to the sea or air, making the Israeli and international ties important. Prime Minister Salam Fayyad keeps on his desk a copy of “Start Up Nation” that tells the story of Israel’s technology industry. It now contributes about 50 percent of the country’s industrial exports two decades after it started putting down roots.

The way to a Palestinian start-up nation has its challenges, Mercy Corps said in a report, citing infrastructure problems and the lack of a venture capital industry. Also, Palestinian companies are small, preventing them from taking on larger projects.

Palestinian consulting company Massar International said Feb. 8 it had raised more than $60 million for what it intends to be a $80 million private equity fund for investing in companies in the Palestinian territories.

Huda El Jack, investment manager of the Siraj Fund, said one of her first investment projects will be ensuring that Rawabi will be a “wired city” with a top-notch infrastructure.

“We want to draw multinationals to have operations here,” El Jack said in a phone interview. “The technology sector is one of those where everyone understands the potential.”